It would be unthinkable for anther Lloyds Banking Group (LSE: LLOY) share price crash, wouldn’t it? As a shareholder, I doubt it’s going to happen. But before I explain my optimism, there are definitely some risks.
The FTSE 100 might have been gaining strength, briefly breaking above 8,000 points. But the Lloyds share price has looked a lot less bullish.
It’s maybe nice to see it above 50p, but that’s about all I can say. Lloyds shares are up only 4.5% in the past 12 months. And we’re still below the peak of January 2022.
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Lending margins
Investors expected rising interest rates to make a significant difference to bank profits. They should, after all, lift lending margins.
With bank reporting season here, we’ve seen some of that. But it wasn’t as big a boost as some observers had hoped for. And bank shares in general have had a bearish couple of weeks.
Lloyds’ own FY22 results looked good enough to me. Profits were flat. But there’s sufficient cash for the bank to lift its dividend 20% to 2.4p per share. That’s ahead of inflation, even current sky-high inflation.
Lloyds will buy back up to £2bn of its own shares too, demonstrating confidence in its cash-generating capabilities.
Unimpressed
Why then are markets unimpressed by Lloyds’ latest figures? There’s plenty of worry going round about interest rates. Will they remain higher for longer than feared? That’s one thought emanating from the US right now.
And a property squeeze isn’t good news for the UK’s biggest mortgage lender. Higher lending margins can be quickly offset by falling lending and mortgage defaults.
Those specific fears for Lloyds could send the shares downwards again in 2023. And global uncertainty resulting in fresh bearish gloom could send them down further.
Don’t panic
So why won’t I panic and sell? It’s all about valuation, and about Lloyds’ guidance for the next few years.
Firstly, that dividend yielded 4.6% on the current Lloyds share price. And the latest statement said the bank “will maintain its progressive and sustainable ordinary dividend policy“.
Operating costs, interest margins, return on equity, asset quality… Lloyds’ guidance for various measures looks just fine, as far out as 2026 in some cases.
Investors perhaps shouldn’t read too much into a company’s extolling of its own virtues. So yes, we need to be cautious.
Cheap?
But the bottom line for me is all about fundamental valuation. We’re looking at a trailing price-to-earnings (P/E) multiple of 7.4, around half that of the FTSE 100. Forecasts show the shares getting cheaper on that measure over the next couple of years too.
Analysts also expect to see the dividend yield reaching 6%, which I’d be very happy to pocket.
In short, I see risk. And I rate the chances of share price weakness this year as significant. But I think the very low fundamental valuation provides more than enough safety margin to cover the downside.
And if Lloyds shares do fall sharply, they could be an even better buy.
